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Facing The Final (Bankruptcy) Chapter: 7

aka – When Liquid Assets Leak Out

So what exactly is “Chapter 7 Bankruptcy?” Well…it’s not good.

The notorious yet somewhat arcane Chapter 7 is when you declare (yes, from the rooftops, in a joyous, mellifluous bellow!) personal bankruptcy, and any assets you possess are liquidated in order to settle your insurmountable debts. This is pretty much a last resort, when you’ve sunken into a financial abyss so grave that your only hope of escape is to relinquish all your worldly possessions. As the online legal symposium findlaw.com reports: “Bankruptcy will ruin your credit for some time to come.” What happens is, a legal “trustee” (this term makes them sound like someone comforting that you can confide in, but in actuality they can be viewed as rapacious reapers of all your remaining objects of worth) is put in charge of determining what you indeed do own and which of these things can be transmogrified into tangible cash. The end result is that you may now be utterly destitute…but at least you’re no longer in debt.

Sounds like either Dante’s 5th or possibly 6th stage of hell, correct?

Gotcha! All is not literally lost. The real deal is that bankruptcy law doesn’t allow for you to be left with nothing (aka zilcho) at all. There are safeguards that protect you from having to start at the actual bottom (otherwise no one would ever do this, right? The somewhat vague and potentially ephemeral concept of ‘crippling debt’ sounds way better to most than actually having nada.)

What really happens to your assets:

Ok, so this ‘trustee’ lady/fellow takes your assets (meaning your home, car, boat, collection of vintage Pokemon cards or Burt Bacharach vinyl) and hosts a massive, close-out, sorry-no-refunds sale. The cold hard cash is then dispensed to the people/agencies/bookies you owe money to. Yet this is not done indiscriminately; there is a hierarchy to the payback process. High up on the list of first to receive their money back, like Oliver Twist on the porridge line, are people who you may owe late child support or alimony payments to. Next down the line are individuals or companies that you owe wages to (the guy who’s been mowing your lawn for the last six protracted summers without pay). Now, this may bring a small smile to your face; the last on this list of the indebted are the credit card conglomerates. Apparently the law views the credit card companies as the ne’er lenient loan sharks that they truly are…ostensibly.

Another plus is that “Once you file Chapter 7, collectors are legally prohibited from contacting you,” states totalbankruptcy.com. You can finally list your number again and go back to using your trusty aol email address, “Hotstuff1999.”

What you need to do this:

Just 335 dollars, and a dream. According to nolo.com, “The whole Chapter 7 bankruptcy process takes about four to six months, costs $335 in filing and administrative fees, and commonly requires only one trip to the courthouse.” If the $335 seems a little steep (especially since you are legally expressing to the world that you have no money), just think what this will save you in the long term: interest fees, late penalties and encounters with surly repossession laborers.

What about the ever enticing “exemptions?”

Exemptions, or as a layperson may call them, ‘exceptions,’ are feasible even when delving into the Chapter 7 realm. You can agree upon some physical objects that that the trustee can not pawn off (like your poignant memory laden shag carpet or your prized Shetland Sheepdog, “Waggy”), and even a degree of cash, too. If your assets have worth over what you owe, you may be entitled to the discrepancy in that amount. For instance, if you owe Visa $9,000, but your Andy Warhol original of Wilfred Brimley is worth $10,000, you may walk away with a cool 1000 clams in your pocket.

What’s the deal with “equity?” …can I keep it? Also…what is it?

There are some loopholes related to Chapter 7 and the equity of your assets. The first question you may have is what, um, is equity. Equity is the difference in amount on what something you own is worth and what you still owe on it. Your one story ranch style home is worth $300,000; you have a mortgage on it of $299,999. You have equity in your home of $1 (score! you own something!) So how does this apply to personal bankruptcy finance annihilation? Here’s a tidy, hopefully practical example: according to lawyers.com, the federal bankruptcy exemption for automobiles is $2,900 (meaning your if your vehicle is valued at this amount or lower, you are free to adorn it with bumper stickers and pine tree air fresheners for generations to come). If you’re car’s bluebook value is $5,000, but you still owe $3,000 on it, then don’t fret: your equity here is only $2,000 and that Pontiac Firebird is still yours to impress neighbors and OkCupid dates alike.

Sweet, right? Well, with every sweet morsel there comes a painful toothache and subsequent trip to a sadistic dentist. If you do get to keep something with equity value, you still need to pay back what you owe on it. In the case of the aforementioned Firebird, you would need to come to an agreement of sorts with the lender on how you will pay back that 3K. The debt is not erased in this circumstance – this type of debt is like Sharpie ink on an Etch-A-Sketch.

Okay…so what if I don’t own anything, have no money, prospects or even any groundbreaking app ideas?

You may be in the best boat (figurative, or course; you don’t own anything) of all when it comes to Ch. 7 ‘Ruptcy. The legal term for Chapter Seven Bankruptcy is “no-asset bankruptcy,” so it sounds like this thing was tailor made for you. The mentality here is that “you can’t get blood from a stone,” so all your debts will still be forgiven. …Almost. There are a few classifications of debts that just can’t be erased; most notably, child support. If you’re lucky enough to not owe that, then you’re essentially free to start a new life – one where you build up your credit one painstaking point at a time.

The most important takeaway:

Chapter 7 Bankruptcy is a little more complex than described here. Alllaw.com says “Filing for Chapter 7 involves preparing a large set of forms and navigating some tricky legal issues.” If you are seriously considering embarking on this debt destruction journey, you must consult with an attorney who specializes in this (hopefully one who is not morally bankrupt). A true purveyor of bankruptcy law will guide you through the process and you can ultimately arise from the ashes of the financial conflagration of your assets like a debt-free phoenix – or maybe one of those cool dragons from Game of Thrones.